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3 reasons for insurers to be cheerful this Christmas: Versloot, Ted Baker and XYZ

The first present to emerge early from Santa’s sack was the Court of Appeal’s much-anticipated decision in Versloot Dredging BV v HDI Gerling Industrie Versicherung AG [2014] EWCA Civ 1349. The appellant shipowners had appealed against a decision of Popplewell J, which found in favour of the marine insurers but which the judge had reached with undisguised reluctance.

The claim concerned a vessel named the ‘DC Merwestone’, whose main engine was damaged beyond repair when seawater flooded into its engine room.

The judge found that the cause of the damage was an insured peril of the sea, namely the fortuitous entry of seawater as a result of crew negligence (the crew had been using an emergency fire hose in freezing conditions but failed to drain the pump afterwards; as a result, seawater in the fire pump froze and expanded, causing a crack through which seawater entered). The judge rejected arguments by the insurers that the loss was caused by lack of due diligence by the owners or by unseaworthiness of the vessel. Accordingly, but for the question whether the owners had forfeited their claim because of an alleged ‘fraudulent device’, their claim would have succeeded.

However, in the course of the insurers’ investigation into the loss, a certain Mr Kornet, who was a director of the company managing the vessel, reported that a bilge alarm had gone off at a particular time but was ignored because it was attributed to the vessel rolling in heavy weather. The underwriters alleged that this was a false claim which had been made either deliberately or recklessly.

Popplewell J found that Mr Kornet had not been told by the crew that the alarm had gone off; or that it had been ignored; or why it had apparently been ignored. His account was given to fit his own theory of water ingress without making any attempt to check with the crew that it was correct. In that sense it was speculation, even though the judge found that Mr Kornet genuinely believed that his account was a realistic explanation of events. In other words, it was a false claim that had been made recklessly.

As such, Mr Kornet’s report was held to be a fraudulent device, his conduct was attributable to the owners, and the owners’ entire claim was forfeited as a result.

On appeal, the owners argued that the forfeiture doctrine which applies to fraudulent claims should not be extended to claims involving fraudulent devices because it is a disproportionate sanction. There is of course a difference between using a fraudulent device and making a fraudulent claim per se: in the former, the insured has used a fraudulent device in support of an otherwise genuine claim; whereas a true fraudulent claim has been – at least in part – made up. It is the difference between, on the one hand, inventing a £2,000 claim for a computer which never existed (even alongside a genuine £16,000 loss) and, on the other, forging an invoice to support a claim for a £2,000 computer that has genuinely been stolen.

In Agapitos v Agnew (“The Aegeon”) [2003] QB 556, Mance LJ (as he then was) said that the fraudulent claims doctrine extended to cases involving fraudulent devices, with the result that a statement which the insured knows to be untrue, or is reckless as to whether it is true or not, will cause the entire claim to be forfeited, even though the claim itself is genuine.

The owners in Versloot argued – and the Court of Appeal accepted – that the decision of Mance LJ in The Aegeon was strictly obiter and so the court was free to consider the question afresh. The Court of Appeal duly did so, but confirmed that Mance LJ had been correct after all. It is now a matter of binding Court of Appeal authority that the fraudulent claims rule applies to fraudulent devices as well.

The Court of Appeal held that there were “several powerful reasons” why the view taken in The Aegeon should be confirmed including:

The rule was founded on the special relationship between insured and insurer and the attendant obligation of utmost good faith. The effect of the rule is that “if you lie to your insurer in respect of anything significant in the presentation of the claim you will not recover anything from him”.

The public policy justifications for the rule: first the policy underpinning the fraudulent claims rule that the insured must not be allowed to think that if the fraud is successful he will gain, but if not, he will lose nothing applies equally to fraudulent devises; secondly the importance of honesty in the claims process is manifest. Most insurance claims get nowhere near litigation because insurers are able to rely on the honesty of their insureds. The draconian consequences of the rule applying to fraudulent devices further such honesty.

The Law Commission had, in its general review of insurance contract law, drawn attention to the particularly vulnerability of insurers to fraud; to the large size of the problem of fraud; and to the rarity of criminal prosecution for such fraud. The Court of Appeal noted that the Law Commission had proceeded on the basis that the fraudulent devices doctrine as laid down in The Aegeon existed.

The Court of Appeal also rejected the owners’ argument that a blanket forfeiture rule for fraudulent devices was disproportionate and unjustifiably infringed their right to peaceful enjoyment of possessions under Article 1 of Protocol 1 to the European Convention on Human Rights. The owners argued that an amount payable under an insurance contract – a right which accrues at the time of loss – is a “possession” within the meaning of this Convention right and that forfeiture of the claim is an interference with that right.

Although the Court of Appeal accepted that the Convention right was engaged, it held that the “bright line rule” had a legitimate public policy aim, namely to deter fraud in the making of claims and to frustrate any expectation that, if the fraud fails, the fraudster will not lose out.

As such, the Versloot decision comes as something of a double whammy in favour of insurers; not only was the fraudulent devices doctrine from The Aegeon confirmed, but the Court of Appeal also held that the doctrine does not fall foul of the ECHR (as incorporated into English law by the Human Rights Act 1998).

One final point is worth making. In considering Mr Kormet’s state of mind when making his reports to the insurers, the Court of Appeal noted that he was “increasingly frustrated that the Underwriters were not paying his claim, particularly because Owners needed money to secure the release of the Vessel from the repairers”.

The longer an insurer holds out on paying or declining a claim, the more risk that an unscrupulous insured may be tempted to consider “improving” its claim by inventing facts or documents in an attempt to get the claim paid. If the insured does so, the entire claim will be forfeited. Frustration will not justify the fraudulent device.

Ted Baker v Axa: The Effect of a Claims Co-Operation Clause

Some further pre-Christmas cheer for insurers can be found for insurers in the outcome of the fairly long-running Ted Baker / Axa dispute. In Ted Baker plc v Axa Insurance UK plc [2014] EWHC 3548 (Comm), Eder J held that a claim for business interruption (“BI”) losses which had varied between £1.98 million and £5.3 million over the course of the claim failed in its entirety because the popular clothing retailer had failed to comply with one of several claim conditions in the policy.

The claim arose from a series of thefts by one of Ted Baker’s employees over a number of years stretching back to 2003. The employee had managed to steal, on a regular basis, six or seven boxes of stock held at Ted Baker’s distribution centre in north London. In the first round of litigation between Ted Baker and Axa in 2012, Eder J held that Ted Baker’s policy with Axa covered such ‘employee theft’.

All that remained for Ted Baker to do, therefore, was to prove its BI loss and to resist Axa’s contentions that it had not complied with claims conditions in the Policy.

These conditions were not particularly unusual. They included the common requirement that, “in the event of any loss destruction damage or event likely to give rise to a claim” under the policy, the insured must notify the insurer immediately and co-operate with the insurer’s requests for supporting documentation. In this case, the co-operation clause required Ted Baker to “deliver to [Axa] at the Insureds [sic] expense (i) full information in writing of the property lost destroyed or damaged and of the amount of loss destruction or damage… [and] (iii) all such proofs and information relating to the claim as may be reasonably required”.

Compliance with the claims conditions was clearly stated to be a condition precedent to Axa’s liability to pay out.

In denying liability to pay Ted Baker’s claim for BI loss, Axa argued that the insured had failed to provide certain information and documentation required by the co-operation condition.. Ted Baker raised a number of responses to this argument, including contractual agreement, estoppel by convention, acquiescence or representation, waiver and bad faith.

One of the breaches relied upon by Axa was that its loss adjuster had asked for a ‘shopping list’ of seven categories of information, ranging from a copy of the thieving employee’s employment file to detailed stock take and stock performance records and this information had not been provided.

The seventh category of information concerned Ted Baker’s profit and loss accounts for 2005 to 2008 together with management accounts for the same period. Ted Baker had not provided this information.

The judge agreed with both of the parties’ experts that there was no good reason why this information had not been provided. He held that Axa had not waived its right to require this documentation, nor was it estopped from relying on the co-operation condition. As a result, therefore, of Ted Baker’s failure to provide its P&L and management accounts, its entire claim for BI loss failed. The judge reached his decision with some reluctance since he had no doubt that Ted Baker had suffered substantial losses (£2.16 million even on Axa’s own experts’ evidence) arising out of thefts which he had previously held were covered by Axa’s policy.

However Axa’s success was based only in respect of this seventh category on the loss adjuster’s shopping list.

As for the other categories, the judge held that Ted Baker had not breached the co-operation condition, because the strategy adopted by Ted Baker had been to wait for Axa to make a decision on liability (that is, whether the claim was covered by the policy at all) before spending time and incurring costs putting together the complex stock information which the loss adjuster had asked for and the loss adjuster had agreed to take instructions on this point. Thus the obligation to provide the information had effectively been ‘parked’. This, as Eder J found, was a limited agreement that the need to do work on those categories because the request was ‘parked’ or, alternatively, an estoppel by representation to similar effect arose.

So there is something here for insureds’ too, and a reminder to insurers, that just as an insured must take care strictly to comply with all claims conditions, an insurer may through its own conduct or those acting on its behalf suspend the insureds’ immediate obligation to comply.

XYZ: An Attempt to Join an Indemnity Insurer to Underlying Proceedings

The third early Christmas present for insurers was delivered in early December courtesy of Thirlwall J in XYZ v Various (including Transform Medical Group (CS) Limited) [2014] EWHC 4056 (QB). The case arose in the course of the ongoing group litigation brought by almost 1,000 women against healthcare providers in respect of allegedly defective breast implants manufactured by the French company, PIP. One of the defendants in these proceedings is Transform Medical Group (CS) Ltd (“Transform”), which is facing some 670 claims. Transform is insured by Travelers Insurance Co Ltd (“Travelers”). Another defendant, Spire, has insurance with RSA.

Transform and the other defendants have brought Part 20 claims for contribution against the UK suppliers of the breast implants, Clover Leaf Products Ltd (“Clover Leaf”). Clover Leaf is insured by Amlin Insurance (UK) Ltd (“Amlin”).

There are disputes as to the insurance coverage provided to Transform by Travelers and to Spire by RSA. For example, there is a question whether claims by a large group of claimants, known as the ‘worried well’, are covered by the relevant insurance policies. At the time of writing, those disputes are due to be resolved in a hearing in early 2015.

Unlike Transform and Spire, Clover Leaf is not in a dispute with its insurer. As such, Amlin is not a party to the proceedings.

Despite this, Amlin is a real target of the litigation. In the event that the breast implants are shown to be defective and either Transform or Spire (or both) are held liable to the claimants, they will seek to and likely recover against Clover Leaf. Clover Leaf will no doubt become insolvent and direct claims will then be made against Amlin pursuant to the Third Parties (Rights against Insurers) Act 1930.

Accordingly, Travelers made an application to join Amlin into the proceedings so that the scope of Clover Leaf’s insurance cover could be ascertained. Travelers argued that Amlin would be brought into the litigation sooner or later and that early settlement would be more likely if all relevant insurers were involved in the litigation. It also argued that Amlin should be bound by the decisions made by the Court in respect of the other insurance policies. Otherwise there would be a risk of inconsistent decisions.

Amlin objected to being joined as a party on the basis that there was no issue between Clover Leaf and itself. Rather, this was simply an attempt by Travelers to discover the limits of the available insurance and to tailor its approach to the litigation accordingly.

Travelers’ application was made pursuant to CPR rule 19.2(2), which has two limbs: (a) and (b). The judge quickly dismissed limb (a), which provides that a party may be added to proceedings if it is desirable so that the court can resolve “all the matters in dispute”. As the judge pointed out, all the matters in dispute in the proceedings were between the defendants and Clover Leaf and between the defendants and their own insurers. All of these matters could be resolved without the addition of Amlin.

The second limb of rule 19.2(2) is slightly more difficult, since it provides that a party may be added where “an issue involving the new party and an existing party… is connected to the matters in dispute… and it is desirable to add the new party so that the court can resolve the issue”.

However, the judge rejected Travelers’ application under the second limb of rule 19.2(2) as well. She held that, although it is likely that any dispute about the public and product liability held by Clover Leaf and written by Amlin will give rise to similar questions to those considered as between Transform and Travellers and as between Spire and RSA, this did not create a connection between them for the purposes of rule 19.2(2)(b).

As the judge said: “However attractively packaged this application may be it is an attempt by Travelers/Transform to establish in advance the depth of another insurer’s pockets… If [Counsel’s] submissions are correct, CPR 19.2(2)(b) would entitle a claimant in a personal injury case to join into proceedings a defendant’s insurers, seeking a declaration as to the scope of insurance available to meet the claim. This would cut across years of jurisprudence to the effect that a claimant must take the defendant as he finds him.”

Accordingly, the judge rejected Travelers’ application to join Amlin into the proceedings. This decision provides comfort to insurers that they can resist being dragged into underlying proceedings by a claimant who wishes to test the limits of the defendant’s insurance cover or the depths of its insurer’s pockets. It is a case to warm the hearts of insurers everywhere at this most festive time of year.

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